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Archegos: Difference between revisions
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===Formal versus informal systems=== | ===Formal versus informal systems=== | ||
And here we see the behavioural crux: we tell ourselves that what matters in risk management are the formal boundaries we draw; the official channels; the technical superstructure of the relationship; the architecture of the parties’ rights and obligations versus each other. But this isn’t true. In practice the relationship is governed by soft, morphing, invisible, ''informal'' boundaries, good and bad. Interpersonal relationships. Insecurities. Understandings. ''Mis''understandings. Past practices. Fear of screwing up. Precedents. Arse-covering. Expectations. Self-serving narratives. Trust. The [[commercial imperative]].<ref>This isn’t the place for it, but note: these fundamental qualities of commercial life are utterly [[Legible|illegible]] to [[neural networks]], [[Policy|policies]] and [[algorithm]]s.</ref> These things don’t show up in org charts or on [[opco]] [[deck]]s. You can’t measure them. To try is to get the wrong end of the stick. | And here we see the behavioural crux: we tell ourselves that what matters in risk management are the formal boundaries we draw; the official channels; the technical superstructure of the relationship; the architecture of the parties’ rights and obligations versus each other. But this isn’t true. In practice the relationship is governed by soft, morphing, invisible, ''informal'' boundaries, good and bad. Interpersonal relationships. Insecurities. Understandings. ''Mis''understandings. Past practices. Fear of screwing up. Precedents. Arse-covering. Expectations. Self-serving narratives. Trust. The [[commercial imperative]].<ref>This isn’t the place for it, but note: these fundamental qualities of commercial life are utterly [[Legible|illegible]] to [[neural networks]], [[Policy|policies]] and [[algorithm]]s.</ref> These things don’t show up in org charts or on [[opco]] [[deck]]s. You can’t measure them. To try is to get the wrong end of the stick. | ||
====Newsflash: bank executives make post facto rationalisations==== | |||
Much was made of the unmonitored gap in responsibility between CS’s co-heads of prime services.<ref>“Co-heads is ''no'' heads”.</ref> The guy in America was a stocks specialist. He wasn’t big on swaps. He thought he was covering ''physical'' prime brokerage only. The guy in London was an old-school European: he thought he was covering ''all'' of prime services, physical and synthetic, ''but only for EMEA''. | |||
No-one, ergo, had their eye on ''synthetic'' prime brokerage ''in America'', being ''just the bit that happened to blow up''. | |||
Thus | Thus the Special Committee identified a ''structural'' shortcoming in Credit Suisse’s management organisation: a [[formal]] black spot on the radar. But, come ''on''. This is no failure of organisation. This is no lapse in formal structure: this is two fallible, mortal humans doing what all fallible, mortal humans do: ''dissembling''. Each man was desperate to duck or deflect, his own patent responsibility for an ''utter balls-up''. This is ''plainly'' a post-facto rationalisation: The [[JC]] has known a lot of senior bankers in his time and never yet has he met one who didn’t run every business he could, and ''claim'' to run the nearby ones he couldn’t. Does anyone suppose, for a moment, that had Archegos made the bank a five-and-a-half billion ''profit'', that either of these gentlemen would be disclaiming all the credit God showers on successful investment bankers? | ||
Here is the category error: to substitute a formal structural | Here is the category error: to substitute a ''formal'' structural flaw for an ''in''formal softness in the [[meatware]] . Executive boards understand formal structural lapses: they validate the [[Rube Goldberg]] machine that sits below them; they bestow primacy — vitality — ''criticality'' on those at the top, in a way that tendentious human mediocrity in some random elsewhere in the organisation doesn’t. | ||
Board members can see, and eliminate, structural gaps. They can solve for them. But if a perfectly sound machine can be upended to the tune of of five billion dollars by quotidian human failings that riddle your organinsation; if the whole machine can be blown up in a moment by uncontrollable acts of vanity, greed, fear or misunderstanding, by ''anyone''<ref>Jerome Kerviel, Nick Leeson, Yasuo Hamanaka, Kweku Aboldoli — these were not senior executives.</ref> if its continued success is a reflection of the happy absence of those traits, then what value the members of that executive board? Are they pilots, or chimpanzees strapped to a rocket? | |||
====It’s a client service business==== | |||
Not only that, but there is a fundamental asymmetry in the ''degree'' of that softness ''between'' the parties. | Not only that, but there is a fundamental asymmetry in the ''degree'' of that softness ''between'' the parties. | ||
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The broker is a ''service provider''; it wishes the client only well. It presents its risk management parameters (for example, rights to raise margin) not as targets it intends to hit mechanistically of their conditions are triggered, but last resorts it will deploy with a heavy heart and ''only if calamity otherwise awaits''. | The broker is a ''service provider''; it wishes the client only well. It presents its risk management parameters (for example, rights to raise margin) not as targets it intends to hit mechanistically of their conditions are triggered, but last resorts it will deploy with a heavy heart and ''only if calamity otherwise awaits''. | ||
So while a contractual right held by the client more or less means exactly what it says, the broker it draws its formal boundaries well ''inside'' the area it is prepared to let the client, in practice, wander. ''[[NAV triggers]] are never exercised''. If the client approaches the edge of that wider area — a ''real'' point of no return for the broker — the broker will not mechanicistically pull triggers and detonate positions: instead, it will reason with the client, realising that precipitous action | So while a contractual right held by the client more or less means exactly what it says, the broker it draws its formal boundaries well ''inside'' the area it is prepared to let the client, in practice, wander. ''[[NAV triggers]] are never exercised''. If the client approaches the edge of that wider area — a ''real'' point of no return for the broker — the broker will not mechanicistically pull triggers and detonate positions: instead, it will reason with the client, realising that precipitous action. | ||
====Hindsight is a wonderful thing==== | |||
{{apocalypse maxim}} | |||
===The broker that didn’t bark in the night-time=== | ===The broker that didn’t bark in the night-time=== | ||